Save For College / Emergencies

By Dan KadlecMonday, May 04, 2009

Chuck Savage / Corbis

If your child is at least 10 years from
college your best shot at keeping up with tuition inflation between now and
then is by investing in a diversified stock portfolio in a tax-advantaged
state 529 plan. Consider using your refund to start or add to such a fund,
which lets you set aside after-tax money that then grows tax deferred and
can be withdrawn free from federal income tax for virtually any expense
related to higher education. In many cases withdrawals are also exempt from
state income tax and you may be able to deduct annual contributions at the
state level. Another good use of your refund, especially during this
recession, is to start an emergency fund. In any climate it's smart to have
up to six months of living expenses stashed away in a safe place like bank
CDs or a money market account. With today's job picture the bleakest in many
years, you should consider building that cushion to a year's worth of fixed
costs.